This article is designed to expand your knowledge on property tax. It shows you how to calculate the amount you need to pay as well as offers advice on building the cost into your property investment strategy.

As an investor it is always important to have an awareness of how property tax can affect your rental property. Not only can it influence your annual positive cash flow, but can make a detrimental difference to whether or not you choose to invest in your rental property.

Luckily working out the taxable profits for your residential letting is simpler than you may think, and you can do it all in the comfort of your own home.

All it involves is the implementation of the following steps.

One: working out your net profit

Based on one property investment, simply use the following equation to arrive at your net profit:

All your rental income – all your allowable expenses

Two: working out your taxable profit

Similar to the calculation above, all you need to do to work out your taxable profit is subtract all your entitled allowances from your net profit.

In terms of ‘allowances’, on top of your expected annual deductions, you can also choose to take off your ‘wear and tear’ allowance (which is based on a percentage of your rent) and your ‘renewals’ allowance.

In both of these circumstances, all they essentially involve is the replacement of furnishings. So should you ever choose to rent out a property that contains no furnishings then you can easily exclude this segment from your equation.

What happens next?

As an investor you will fall into one of two categories when it comes to the amount of taxes you pay: those who earn under £2,500 and those who earn above £2,500.

Should you ever fall into the below £2,500 category, you will need to fill in a P810 form in order to declare your earnings, but if you are one of those who earns more than £2,500 a year on your property investments – as the majority of you will be - you will need to fill in a Self Assessment tax return form.

Now if you do fall into this latter category, declaring your taxes gets slightly more complicated. If for example you earn over £15,000 a year on your rental properties, then you need to declare it on the land and property pages of the full Self Assessment tax return.

But if on the other hand you do earn below £15,000 a year, all you need to do is fill in a shorter 4 page version of this form that basically asks you for your rents, expenses and all that they relate to.

With this information, the tax office will be able to work out your rates and give you an overall perception of your annual tax deductions.

For the majority of investors your taxable profits will unfortunately exceed your yearly allowances, and as a result you will have to pay the normal income tax rate. That being said there may be occasions where you find that you do earn less - due to one unforeseen circumstance or another - which is where having an understanding of your taxable profits, can be so invaluable.

So give it a try and begin broadening your property awareness, it could make all the difference you need.